Wednesday on Twitter, legendary technician Ralph Acampora laid out 11 reasons why he’s thinks that stocks are in a secular bull market. Ralph is in the camp that corrections or even bear markets are buying opportunities for the long term. Here’s the list:

$FXI is the iShares FTSE China 25 Index Fund. I think this would be a logical place to enter a trade with limited risk and a nice reward opportunity. But before we even get into the chart, understand that the relative strength out of this space has been tremendous. After underperforming the United States for a solid three years, China has been on fire since early September relative to the S&P500. This is really the reason we’ve been watching so closely.

Now to the chart. This thing is beautiful. Look at the support from March and April that broke down and turned into 5 months worth of resistance. As always, the more times that a level is tested, the higher the likelihood that it breaks. And in this case, it took 4-5 tests of the mid-35s to get back above. So now polarity should theoretically come into play turning that killer resistance into new found support.

But wait! There’s more! Look at the rising 50-day moving average (in blue) coming up and catching that price action as it also tests the 200-day (red):

Momentum also favors the bull case here for China. The October breakout in $FXI took the relative strength index into overbought conditions. We love that as it shows us evidence of an extreme amount of buying. Also, support here in the low 40s for RSI is definitely a bullish characteristic.

We’ve been talking about the potential for Emerging Markets to start outperforming (see Reuters and MarketWatch). So if we’re going to be right on that call, then we should start to see a rally here for China. As far as upside? We could see mid to high 40s in $FXI when all is said and done.

And I think the best part about this position is the simple risk management aspect that it brings. Remember that it’s not all about being right and trying to figure out how high something is going. For us, the most important thing to ask is, How much are we willing to risk on this one? When we’re wrong, we don’t want it to matter. And on this, we wouldn’t want to be long below 35.40, which is only about 1% from current prices. So to risk 1-2% for a 35-40% potential is the perfect trade for us. And I’ll say it again – for us. Everyone is different. We like to assume that we’re wrong before entering positions. Most people I speak with assume they’ll be right. That doesn’t seem like the right mentality to have.

Decision time for China. The Shanghai Composite is testing long-term trendline support that goes back to the mid-1990s. Resistance up top is a trendline down from the euphoric highs of 2007. So we’re essentially at the apex of two converging meaningful trendlines.

This is a logarithmic scale weekly line chart of the benchmark Shanghai Composite:

The current prices are near the 2001 highs, right before the Shanghai Composite got cut in half. There is memory at this price. That former resistance adds additional support at these levels.

The consequences of a breakdown below long-term support would really be damaging to this chart, and paints a poor picture for China. But I think there is an overwhelming amount of support where the higher probability move is a bounce. And a breakout above an almost 5-year down trendline could be explosive.

So as you can see, there’s a lot going on right now in this China chart. And I think it’s important to at least stay for the outcome. Regardless of what asset classes you own, this is probably going to have an impact.

For those who don’t know, Jordan Kotick is without a doubt one of my favorite technicians of all time. He’s someone who I looked up to as a young lad when I first started looking at charts. Today, Jordan is the Head of Technical Strategy at Barclays and his Intermarket work is second to none.

This week, Jordan Kotick took Intermarket Analysis to a whole new level with his Dow Theory China. I’m not even going to explain. Just watch – he crushes it:

When the Shanghai Stock Exchange reopens next week for trading, things could get interesting. It’s amazing to me that they can just close for a week like it’s not a big deal. Anyway, the following chart is mostly speculation. I am really really early with some estimates that can prove to be wrong quickly next week. The point of this is really to get the mind thinking. Let’s be aware of what is out there. What potentially can go right and what can go wrong?

As we have seen here since the Spring, it’s China that leads us lower and it will be China that leads this US stock market higher. This analysis is very preliminary and there are more lines drawn than I typically approve of, so bear with me:

Let’s begin with simple support levels. Last July, a monster rally got started in the Shanghai Composite from the same levels that the market closed before the holiday last week. Call it coincidence if you’d like, but this is the 61.8% Fibonacci retracement of the Fall 2008 lows to the summer 2009 highs. To the penny guys.

So if we roll over below these critical levels, then we should expect a test of 2060 in the Composite, and perhaps an eventual retest of the 2008 lows below 1700. If you are looking to get short stocks, or get short risk-assets, then that break is your tell. If you would like to participate in a risk-on rally and believe that the recent selling of US Treasury Bonds (like they were Dutch Tulips) continues, then you want to see the Shanghai hold on to these lows.

Now for projections (assuming support holds), 2800 looks like a good initial target. This would take us back to the July 2011 highs where we also find the declining neckline from a potential Head & Shoulders pattern. I added the 3 letters S H & S just to show that the potential is there. We won’t know for a long time. If indeed this is one of those, and it is way to early to call, then the targets on the Shanghai would be somewhere around 3900-4000. But by then US Stocks would be so on fire and people would be making so much money in the stock market, than no one will remember me even writing about it.

So let’s not worry so much about that now. As an American trader with thousands and thousands of American stocks to trade, I will be using the Shanghai Composite as a guide. Do I want to push the Risk-On envelope? Or back off and buy some Dutch Tulips US Treasury Bonds.

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